Short-Volatility ETF Plunges Over 60% In After-Hours Trade

Shares of a popular exchange-traded fund designed to bet against volatility plunged in after-hours trading on Monday. The VelocityShares Daily Inverse VIX Short Term ETN XIV, -14.32% lost 62%, after getting crushed 14% in the regular session. Meanwhile, an exchange-traded fund designed to bet on volatility surged after-hours, as the Barclays Bank PLC iPath S&P 500 VIX Short-Term Futures ETN VXX, +33.48% leapt 32%.

The rapid unwinding of complacent markets may have claimed its first victim after a Wall St exchange-traded fund which gains from falling volatility crashed in after hours trade, triggering the closure of a related Tokyo-listed product.

The $US2 billion VelocityShares Daily Inverse VIX short-term exchange-traded note, trading in New York under the ticker XIV, was hammered 14 per cent overnight as the volatility index, or VIX, spiked amid the worst fall for US stocks since August 2011.

But in after hours trading the fund’s price crashed from $US99 at the close to $US20, or by just shy of 80 per cent, Simon Ho of Triple3 Partners told The Australian Financial Review.

That had analysts wondering whether investors had grown nervous the fund would trigger a clause in which the fund would wind up in the event of losses in excess of 80 per cent.

The inverse volatility listed indexed fund dropped over the regular New York session on Monday night only to crash in …
The inverse volatility listed indexed fund dropped over the regular New York session on Monday night only to crash in after-hours trade.
“It’s hard to say whether [traders] at the end of the day knew that it was going to be in breach of that rule,” Simon Ho of Triple 3 Partners said. Mr Ho is an expert in volatility and manages the Volatility Advantage Fund.

In a strong sign of things to come, this morning Nomura Europe Finance announced that its Tokyo-listed exchange-traded inverse VIX product “will be redeemed early, after a condition for early redemption was triggered due to movements in the underlying index”.

The XIV fund has proved extremely popular among investors who have bet on the extended period of calm on markets would lead to continuing low and falling volatility.

Last year the fund made a 180 per cent return. But many experts, including Mr Ho, have been warning of the risks of a sudden and devastating effect a return to more normal levels of volatility would have on some of these products.

“To date it’s only been a three-day sell off but it’s been powerful enough trigger this kind of response.”